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Edited Transcript of PFPT earnings conference call or presentation 20-Apr-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Proofpoint Inc Earnings Call

Sunnyvale Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Proofpoint Inc earnings conference call or presentation Thursday, April 20, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary L. Steele

Proofpoint, Inc. - CEO and Director

* Jason Starr

* Paul R. Auvil

Proofpoint, Inc. - CFO

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Conference Call Participants

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* Andrew James Nowinski

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Catharine Anne Trebnick

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst

* Erik Loren Suppiger

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Gabriela Borges

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Gur Talpaz

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Howard S. Smith

First Analysis Securities Corporation, Research Division - MD

* Jayson Noland

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Jon Philip Andrews

D.A. Davidson & Co., Research Division - VP and Senior Research Analyst

* Jonathan Ho

William Blair & Company L.L.C., Research Division - Technology Analyst

* Kenneth Richard Talanian

Evercore ISI, Research Division - Analyst

* Matthew Hedberg

RBC Capital Markets, LLC, Research Division - Analyst

* Melissa A. Gorham

Morgan Stanley, Research Division - VP

* Michael Wonchoon Kim

Imperial Capital, LLC, Research Division - SVP

* Patrick Colville

Arete Research Services LLP - Analyst

* Philip Alan Winslow

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Robbie David Owens

Pacific Crest Securities, Inc., Research Division - Partner and Senior Research Analyst of Security and Infrastructure Software

* Sarah Emily Hindlian

Macquarie Research - Senior Analyst

* Srini Nandury

Summit Redstone Partners, L.L.C - MD, and IT Hardware and Software Analyst

* Steven R. Koenig

Wedbush Securities Inc., Research Division - Research Analyst

* Timothy Elmer Klasell

Northland Capital Markets, Research Division - MD and Senior Research Analyst

* Walter H Pritchard

Citigroup Inc, Research Division - MD and U.S. Software Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Proofpoint First Quarter 2017 Earnings Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jason Starr, Vice President of Investor Relations. You may begin.

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Jason Starr, [2]

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Thanks. Good afternoon, and welcome to Proofpoint's First Quarter 2017 Earnings Call. With us today are Gary Steele, Proofpoint's Chief Executive Officer; and Paul Auvil, Proofpoint's Chief Financial Officer.

We'll be discussing the results announced in our press release that was issued after the market closed today, and a copy of this is available on the Investor Relations section of our website.

During the course of this call, we will make forward-looking statements regarding future events and future financial performance of the company, which are subject to material risks and uncertainties that could cause actual results to differ materially.

We caution you to consider the important risk factors contained in the press release and this conference call. These risk factors are also more fully detailed under the caption Risk Factors in Proofpoint's filings with the SEC, including our most recent Form 10-K.

These forward-looking statements are also based on assumptions that we believe to be reasonable as of today's date, April 20, 2017. We undertake no obligation to update these statements as a result of new information or future events.

Of note, it is Proofpoint's policy to not reiterate or adjust the financial guidance provided on today's call unless it is also done through a public disclosure with the SEC on Form 8-K.

Additionally, we will present both GAAP and non-GAAP financial measures on today's call. These non-GAAP measures exclude a number of items as set forth in our release.

These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results, and we encourage you to consider all measures when analyzing Proofpoint's performance. A reconciliation of GAAP to non-GAAP measures and a list of the reasons why the company uses these non-GAAP measures are included in today's press release.

So that said, I'll turn the call over to Gary.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [3]

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Thanks, Jason. I'd like to thank everyone for joining us on the call today, which marks the fifth anniversary of Proofpoint's first day of trading on NASDAQ, where we priced our IPO at $13 per share, representing an enterprise value of approximately $350 million.

I wanted to take a moment to highlight some of our important accomplishments over these past 5 years. In 2012, the company debuted as a provider of world-class e-mail security solutions, with annual revenues of roughly $100 million in nominal cash flow. And since then, through a combination of hard work, persistence and consistent execution, we have built the business into an industry-leading cloud-based security and governance platform, with this year's revenues expected to be approximately $0.5 billion, with free cash flow margins of 20% and a clear line of sight to our 2020 target.

Our commitment to innovation, as evidenced by our investment in research and development over the years, has enhanced our competitive advantage, enabling us to expand our product suite to include 9 different solutions, more than doubling our total addressable market to over $10 billion.

Of particular note is our Targeted Attack Protection solution or TAP, introduced shortly after our IPO, which has proven to be one of the most successful product launches in the company's history.

Our persistent focus on our customers' security requirements, through the application of leading-edge technology, customer service and innovation, has enabled us to more than double our customer base, which now includes 34% of the Fortune 1000, while also expanding our footprint within our existing customers, with roughly half now running 2 or more of our solutions.

As a final point, I am pleased to note that we just recorded our 55th consecutive quarter of sequential revenue growth, enabling us to deliver a 5-year compound annual growth rate of over 35%, highlighted by our ability to consistently meet or exceed our financial guidance as a public company.

Now moving on to our results for the first quarter. We were very pleased with our strong start to the year. Our ability to once again exceed expectations was driven by our ongoing demand for advanced threat solutions, continued high, competitive win rates, robust new and add-on activity, excellent traction with our emerging products and a world-class renewal rate that continues to exceed 90%.

The broad demand drivers benefiting the company continue to be firmly in place, including the overall threat landscape, the ongoing transition to the cloud quickened by the shift to Office 365 and the developing trend towards customers consolidating their spending around world-class platforms, such as Proofpoint's cloud-based security suite.

In particular, the demand for advanced threat solutions is driven by the constantly evolving nature of the threat landscape as attackers continue to target people, not infrastructure, with their malicious activities.

One of the most troubling threats over the past year is known as business email compromise, also referred to as BEC or e-mail spoofing, that easily bypasses traditional defenses.

According to a survey of over 5,000 enterprises that we conducted during the fourth quarter of 2016, BEC attacks increased 45% over the prior quarter, with 75% of these companies targeted with at least one campaign during this period.

In addition, 2/3 of all BEC attacks spoof the customer-specific e-mail domain, meaning that these malicious e-mails display the same domain as that of the enterprise itself, making it incredibly difficult to detect.

As a result, organizations need a comprehensive solution that provides a combination of detection, authentication and monitoring to ensure they don't fall victim to these attacks, which we believe positions Proofpoint to maintain its momentum for many years to come.

Now turning to some of our key accomplishments during the first quarter. We were very pleased with the ongoing traction of our advanced threat product suite, which includes both TAP and other advanced security solutions, as it represented roughly half of the company's new and add-on business for the quarter.

Some of the noteworthy TAP wins during the quarter included a Fortune 100 technology company that added TAP for 135,000 users; a large state government that added TAP for over 60,000 users and a large energy provider that added TAP and Threat Response for 20,000 users.

A long-term catalyst that is driving demand for Proofpoint's broader security and compliance solutions is the overall transition to the cloud, which requires enterprises to replace their legacy on-premise solutions with cloud-based alternatives.

The shift to Microsoft Office 365, in particular, has been a great example of this effect as customers look for additional security capabilities to complement and enhance the baseline solutions provided by Microsoft. One notable example this quarter was one of the world's largest automobile manufacturers who had recently made the move to Office 365 and was utilizing the Microsoft Enterprise Online Protection or EOP and Microsoft Advanced Threat Protection or ATP capabilities.

Using our threat discover tools and the basic proof of concept, our team was able to demonstrate our ability to meaningfully improve their e-mail security defenses, resulting in the customer choosing to quickly upgrade their production environment to Proofpoint in order to fully protect their 37,000 users.

Additional examples of Microsoft Office 365 customers utilizing the Microsoft security solutions, who also bought Proofpoint to augment their capability during the first quarter, included a large mass media corporation that added Protection, TAP and Threat Response for over 15,000 users and a Fortune 1000 real estate company that purchased Protection, TAP and Threat Response for 7,000 users. During the first quarter, our strong results were also driven by the favorable competitive environment as large and midsized organizations are switching to Proofpoint's integrated cloud-based solution and away from legacy providers.

A few examples of Protection wins during Q1 included a large health care provider that purchased Protection, Privacy, TAP and Threat Response for 37,000 users; a global industrial services company, which purchased Protection and TAP for 35,000 users; and a global life insurance company that purchased Protection, TAP and Privacy for 17,000 users.

With regards to our partnership with Intel-McAfee, we continue to be very excited about the opportunity. During the first quarter, we saw our pipeline from this partnership continue to grow, while the contribution to new business closed during the quarter was within our historical norms. As a reminder, McAfee's e-mail security solution was comprised of both a cloud and on-premise offering. The cloud portion of their business, adopted primarily by small- and medium-sized businesses, just passed us in the blank deadline. We are now progressing further into the enterprise portion of their business, all of whom have been given until 2021 to complete their migration.

Since 4 more years remain on this wind-down period granted by Intel for this agreement, we believe we are still in the early innings of this opportunity. I'd like to again highlight that the total McAfee conversion opportunity not only includes the value of the recurring subscription business purchased to replace the baseline McAfee e-mail security solution but also the upsell of additional Proofpoint products to these customers, which we believe could double or even triple customer spend over time.

As a result, we believe that Proofpoint is uniquely positioned to capitalize on this overall opportunity over the next several years.

Turning to our emerging products, which include our social, mobile, Threat Response, threat intelligence and Email Fraud Defense capabilities, during Q1, these offerings continued to be an excellent source of growth. Yet again, this quarter, our bookings of new and add-on business closed during the quarter from our emerging products grew by over 100% year-over-year and represented more than 10% of the new and add-on business closed across the company during the quarter.

Our recently introduced Email Fraud Defense product had another solid quarter, driven by the overall increase in BEC attacks that I highlighted earlier. A few of the key emerging product wins this quarter included 2 large European banks, both of which purchased our social solution; a large hospital focused on children's ailments that purchased Email Fraud Defense; and a Fortune 100 multinational conglomerate that purchased Mobile Defense.

During the first quarter, our archiving, privacy and governance segment continued to perform well, growing 28% year-over-year. For the next few quarters, we expect the growth from this segment to decline moderately as the emphasis around our emerging products take center stage as a growth catalyst for the company.

And with that said, we have a number of larger archiving opportunities in our pipeline and remain confident about this segment, that this segment will continue to contribute nicely to overall growth, cash flow and profitability longer-term.

As a reminder, our 9 distinct product offerings provide us with a tremendous add-on opportunity across our installed base and leave us well positioned as our customers gradually consolidate to a smaller number of strategic security vendors. As a result, we continue to have significant opportunity to expand our revenue footprint within our existing customer base, particularly since 50% of our customers still only have a single product.

In terms of our ecosystem partnerships with Palo Alto Networks, CyberArk, Imperva and Splunk, we remain very excited about these relationships as all of the partners continue to be very engaged during Q1.

Notable deals closed during the quarter that were influenced by our ecosystem partnerships included a Fortune 100 financial services company that bought Protection, TAP and Privacy for approximately 38,000 users; a Fortune 500 retailer that purchased Protection, TAP and Threat Response for 5,000 users; and a Fortune 200 manufacturer of specialty materials that purchased Protection and TAP for 37,000 users.

I would also like to point out that we were once again pleased with the momentum of the channel as it accounted for over half of the new and add-on business closed for the quarter.

Finally, we continue to make progress towards further expansion abroad, with our international business growing 38% year-over-year. Notable international deals closed during the quarter included a global 500 European bank that bought Protection for 35,000 users; a large European security services company that bought Protection, TAP and Email Fraud Defense for 18,000 users; and a large Asia Pacific-based insurance company that bought Protection, TAP and Threat Response for 15,000 users.

The addressable market outside of the United States, in both EMEA and Asia Pacific, represents a compelling future growth opportunity for Proofpoint, and we plan to continue to increase market share in these regions.

So in summary, I am very pleased with our strong start to the year and the ongoing momentum we are seeing across our entire business. As a result, I believe we are well positioned for our growth in the years to come and to gain share in the over $10 billion total addressable market.

With that, let me turn it over to Paul.

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Paul R. Auvil, Proofpoint, Inc. - CFO [4]

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Thanks, Gary. We were very pleased with our ability to once again exceed expectations across all of our key financial metrics during the quarter.

First quarter revenue totaled $113.3 million, up 43% year-over-year and above our previously announced guidance range of $109 million to $111 million.

Billings for the first quarter were $137.4 million, reflecting growth of 40% on a year-over-year basis and exceeding the high end of our previously announced guidance range of $133 million to $135 million. As expected, contract duration came down nicely as compared to our fourth quarter results, with duration moving towards the lower end of our historical range of 14 to 20 months. This trend is reflected in our deferred revenue balances, which ended the quarter at $336 million in total, up $24 million sequentially, with short-term growing by $18 million and long-term growing by $6.2 million.

Turning to expenses and profitability for the first quarter. On a non-GAAP basis, our total gross margin was 77%, which was above our expectations, driven by revenue upside delivered during the quarter, coupled with our ongoing improvements in the efficiency of our cloud operations.

During the first quarter, total non-GAAP operating expenses increased 31% over the prior year period to $79.8 million, representing 70% of total revenue, improved from 77% during the same period last year.

Growth in spending was primarily driven by hiring in R&D and sales as we added key talent to expand the capabilities of our product offerings and to drive both new customer acquisition as well as add-on sales to our existing customers.

In terms of profitability for the quarter, we reported positive non-GAAP net income of $5.5 million. This was above our guidance range of $3 million to $4 million, driven by the upside to revenue, coupled with focused spending discipline across all of our global business operations. This result translated to $0.12 per share based on 46.7 million fully diluted shares outstanding and above our guidance of $0.07 to $0.09.

Note that this calculation excludes the 8 million shares associated with our convertible notes as the "If-Converted" threshold was not met during the quarter. As we were very close to this threshold for the quarter, the impact of having 8 million fewer shares used in the EPS calculation is essentially awash against the add-back of 1.86 -- $1.06 million in interest from the convertible notes and as such, either method yields effectively the same EPS result for the quarter. We have included a section in our press release entitled, "Computational Guidance on Earnings Per Share Estimates," which is intended to provide additional details on this topic and explain the resulting differences in share count used in these calculations based on our results.

On a GAAP basis, we recorded a net loss for the first quarter of $25.5 million or $0.59 per share, based on 43.2 million shares outstanding. In terms of cash flow, we generated $40.5 million in operating cash flow and invested $12.3 million in capital expenditures, resulting in free cash flow for the quarter of $28.2 million or 25% of total revenue.

This result was well above our guidance range of $15 million to $20 million, primarily due to strong billings and collection trends, with customers paying better than timely during the quarter as evidenced by our DSOs of 38 days, a record low over the course of our 5 years’ operating as a public company.

We ended the first quarter with $413 million in cash and short-term investments and $372 million in debt compared to $397 million in cash and short-term investments and $367 million in debt as of December 31, 2016.

This sequential increase in cash during the quarter was driven primarily by cash generated from operations as well as contributions to capital from stock option exercises and our employee stock purchase plan.

Now turning to our financial outlook, starting with the second quarter of 2017. We currently expect billings to be $141 million to $143 million, resulting in year-over-year growth of 40% to the midpoint. This guidance assumes the contract duration remains at the low end of our historical range.

Regarding our revenue outlook, I would like to remind everyone that just as we discussed in our call in January, we are entering a period of challenging year-over-year comparisons given the extraordinary and noteworthy performances that we delivered over the second, third and fourth quarters of 2016.

For the second quarter, we are targeting a revenue range of $118 million to $120 million or 32% growth year-over-year at the midpoint. As a reminder, during the second quarter of 2016, the company benefited from exceptional linearity in terms of the timing of new and add-on business booked, which creates a particularly difficult year-over-year comparison for the coming quarter.

We expect second quarter non-GAAP gross margin to be approximately 76.5%, a modest decline from the 77% recorded in Q1 as our spending continues to catch up with the accelerated revenue delivered during the past several quarters. We expect second quarter non-GAAP net income to be $5 million to $6 million or $0.11 to $0.13 per share, and this assumes an income tax provision, exclusive of discrete items, of $900,000 to $1 million during the quarter, depreciation of approximately $6 million and a share count of 54.8 million fully diluted shares outstanding and adding back the quarterly cash interest expense associated with our convertible notes of $1.06 million as described by the "If-Converted" method.

In terms of free cash flow, as discussed during our call in January, we expect this year to follow a similar pattern to our results in 2016, with the majority of the cash flow delivered in the second half of the year. Given our strong start here in Q1, we expect to end the first half with roughly $40 million in free cash flow and hence $11 million to $12 million during the second quarter, marking a very strong start toward our goal for the full year. This second quarter guidance includes capital expenditures of roughly $10 million.

For the full year perspective, we are increasing our guidance driven by the Q1 overperformance and the expected ongoing strength of our business. Specifically, we now expect billings to be in the range of $619 million to $623 million, which represents an annual growth rate of 34% at the midpoint of the range, and this compares to our previous guidance of $611 million to $615 million. With this billings performance, we are also increasing our total revenue guidance, with a new range of $496 million to $500 million, reflecting an annual growth rate of 33% at the midpoint, and this compares to our previous total revenue guidance of $488 million to $492 million or 31% growth. We continue to expect full year 2017 non-GAAP gross margins to be approximately 76.5%, demonstrating ongoing progress toward our 2020 target range of 77% to 79%. As a result, we expect full year 2017 non-GAAP net income to be $26.5 million to $28.5 million or $0.56 to $0.59 per share, an improvement from our previous guidance of $23 million to $25 million or $0.49 to $0.52 per share.

Our new non-GAAP EPS guidance for 2017 is based on approximately 55.3 million fully diluted shares outstanding and adding back the $4.2 million of cash interest expense as described under the "If-Converted" method. Our guidance also assumes depreciation of approximately $24 million and an income tax provision, exclusive of potential discrete items, of approximately $3.8 million to $4 million.

Finally, we are raising our free cash flow guidance for the full year to the range of $98 million to $106 million or just over 20% of revenue at the midpoint, with the majority of the cash flow delivered in the second half of the year, similar to last year. This includes capital expenditures for the full year of $40 million to $42 million.

It is important to note that we are producing this cash flow with an average billed contract duration in the mid-teens, based on a model with over 95% recurring revenue and renewal rates over 90%, which highlights the very high quality of the recurring cash flow that our business model generates. A reconciliation of our GAAP to non-GAAP guidance for both the second quarter and full year 2017 can be found in our release that we issued this afternoon.

So in summary, we are very pleased with our execution and our first quarter performance, which paired strong top line growth with meaningful expansion and profitability as well as free cash flow. In addition, our increased 2017 expectations demonstrates further progress towards Proofpoint's goal of achieving our 2020 targets of generating approximately $1 billion in revenue, with free cash flow of approximately $250 million or 25% of revenue.

I would like to highlight the disciplined growth, paired with a focus on driving free cash flow expansion year-over-year, is a hallmark of how we operate the business and one which we expect to continue to deliver going forward in our ongoing focus to create additional value for our shareholders.

We will look forward to providing additional details on this objective at our upcoming Analyst Day to be held in New York City on September 7.

Before turning it over to the operator for questions, I wanted to note that due to the timing of the Fourth of July holiday, we do plan to hold our Q2 earnings call on July 27, which is a week later than our typical second quarter reporting cadence. (Operator Instructions) Thank you for taking the time to join us on our call today.

And with that, we would be happy to take your questions now. Let me turn it back over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question today from Philip Winslow with Wells Fargo.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [2]

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Really just a question on some -- really questions that we have been getting recently, kind of your concern is really about the sales force attrition and pricing. I wonder if you could comment on those 2, what you sort of saw this quarter because it doesn't seem like there were issues in the results or the guidance there.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [3]

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Yes, on both of those. So from a sales force attrition standpoint, we've seen very consistent attrition over the last 3 years. There's been no spikes, no changes at all. And then with respect to pricing, pricing has held extremely consistent, and we look at this quarter-on-quarter, we see no changes in pricing across our products for the last several years.

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Operator [4]

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Our next question is from Melissa Gorham with Morgan Stanley.

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Melissa A. Gorham, Morgan Stanley, Research Division - VP [5]

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Gary, so you talked about the McAfee opportunity and how much more runway you have in that, but I'm just wondering if maybe you can provide a little bit more color in what you're assuming in terms of the FY '17 guide. Are you still assuming share gains in line with historical levels or share gains ahead of what you've seen historically?

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [6]

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We -- so as we think about the McAfee opportunity, we continue to be excited and we see a significant number of those larger enterprise opportunities in our pipeline. And so that feels very good to us. Having said that, we don't -- we're not assuming some extraordinary performance in our guidance. We're assuming that our McAfee portion of the business remains within historical norms.

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Operator [7]

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And our next question is from Matt Hedberg with RBC Capital Markets.

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Matthew Hedberg, RBC Capital Markets, LLC, Research Division - Analyst [8]

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We've been talking about TAP and the success for a long time. But clearly, you're starting to reference Office 365 more and more in your prepared remarks. It seems like you're getting really, really nice traction there. I'm wondering what inning are we in. I would assume that this could be more like a 3- to 5-year driver for you guys. But curious, where is it versus your expectations because it also seems like it's quite a large opportunity?

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [9]

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Yes, no, it's definitely a very significant opportunity for us. And while we don't have exact numbers of penetration of Office 365 within the overall exchange base, our point of view is that it's still probably in the high teens, maybe, mid- to high teens in terms of overall penetration. So we view this opportunity as an opportunity that extends itself for 3 to 5 years. And so from our point of view, we're just getting started. And I would point to -- example I would give there is this regulated industry. There's lots of customers who have a desire to go, but it's going to take them years to get ready and years to move. And so while aspirationally, they're thinking about it, they're beginning to plan, it's beneficial to us because they engage us in those conversations. But this is an opportunity that is a great growth catalyst for many years to come.

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Paul R. Auvil, Proofpoint, Inc. - CFO [10]

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Yes, the other thing I'd add that I think is important to keep in mind as well is that even as that starts to become -- playing through, with 25%, 30%, 40%, 50% of people moving over, as we talked about in both this call and the last call, we do have plenty of examples of people who will move over and try out Microsoft to see if it works and then ultimately realize it's far short of their requirements and we upgrade them later. So even as people do move to Office 365, it doesn't mean that if they haven't picked Proofpoint at that stage, that it's an opportunity that's lost for all time. It just means we'll come back around and pick it up at some point further down the road.

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Operator [11]

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Our next question is from Sarah Hindlian with Macquarie.

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Sarah Emily Hindlian, Macquarie Research - Senior Analyst [12]

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So I wanted to talk a little bit about what you're seeing in the archiving business and any trends you're seeing there in the shift to enterprise, assessing your archiving technology, given some of the larger archiving players in the marketplace there are being a little bit disintermediated.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [13]

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Yes, no, great question. So what we are seeing, as we talked about, is from a competitive point of view, there appears to be lack of investment in this overall segment and that's creating opportunity for companies like Proofpoint with a next-generation offering. What we do see is those larger opportunities coming into our pipeline. There is lots of discussion and evaluation on behalf of organizations globally about what do they want to do next for their archive. We do think those deals will take more time to get through the pipeline. So as we indicated, we think in the short term, we'll see some deceleration in growth in that segment, but long term, there's just tremendous opportunity there.

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Operator [14]

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Our next question is from Rob Owens with Pacific Crest Securities.

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Robbie David Owens, Pacific Crest Securities, Inc., Research Division - Partner and Senior Research Analyst of Security and Infrastructure Software [15]

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My question was around, Paul, your comments with regard to duration and just the puts and takes in terms of long-term deferred revenue because a year ago, you saw your long-term deferred revenue tick down in the first half, in Q4 to Q1, Q1 to Q2. And at these low-duration levels now, we're seeing an expansion in long-term. Understanding we cannot see the aging of the buckets and things of that nature, so maybe, a, you could help us with the walk there, and b, given your duration comments, it's still one question, just 2 parts, Paul, is it time to reconsider your free cash flow margin because should duration remain at these levels, you're already at 20%, I think with the goal of getting to 25%, with still some time to get there?

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Paul R. Auvil, Proofpoint, Inc. - CFO [16]

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Yes, good question, and we do allow multipart questions as long as it's only asked at one time. So duration definitely improved nicely from Q4 to Q1, but we're still not all the way at the low end of our range. And so when you see that $6 million increase in our short-term deferred, it reflects the fact that we haven't quite bumped all the way to the bottom. With that said, one thing I'd like to point out to everybody because I think it's helpful to keep in mind, remember that this period last year, we had, had roughly $5 million of renewals that have been pulled between quarters. And so as a result, the growth that you see stated in terms of the billing print is understated as a result. Now if you want to then go ahead and adjust for some of the additional short-term deferred revenue that we created, in the end, you still end up with about a 40% print overall. So the net of it is, we had a very strong quarter. We're very pleased with how the numbers came together. And now to your broader question, as we think about where things go from here, I think we'll probably have some updated thoughts when we get to the September Analyst Day. I think for now, to your point, given what we produced in the second half of last year, given the numbers we put up this quarter, clearly, we feel reasonably comfortable with the 2020 model that we put out there, which is roughly $1 billion of revenue and 24% to 26% free cash flow. As we look at how the results come together in the next couple of quarters, we'll be taking that into account as we think about our prepared remarks for the September Analyst Day, if that's helpful?

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Operator [17]

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Our next question is from Walter Pritchard with Citi.

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Walter H Pritchard, Citigroup Inc, Research Division - MD and U.S. Software Analyst [18]

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Paul and Gary, I think one thing that we're hearing a lot about in the last couple of quarters is some of the new products driving some strength. I'm wondering if you could talk about any metrics you can give us around dollars per seat or -- dollars per customer are probably tougher, but dollars per seat and how that is proceeding as a driver for your business most recently here.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [19]

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Yes, let me lead off, and I'll let Paul comment on pricing. And just a couple points of color. So we mentioned in the prepared remarks the strength of Email Fraud Defense. It's really unusual to have a product that we've been selling for 2 quarters have such strong performance in such a short period of time. So we believe that we're definitely on the right track because it's leveraging what's going on in the overall threat landscape. We also are seeing broader and more interest on the social side. We have yet another very good quarter with respect to social. And then even in products that we haven't talked a lot about in the past, like our Threat Response solution, which is our orchestration and automation solution for security operation centers, that product had a really good quarter. So we're seeing collectively these bring together really nice growth. I'll let Paul -- because it's a combination of products, I'll let Paul comment on the pricing of these individual solutions.

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Paul R. Auvil, Proofpoint, Inc. - CFO [20]

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Yes, I would say that, yes, what we're generally seeing on the new products is pricing that's consistent with our legacy products. So if you think about protection for a 5,000-seat account being around $10 a user, a year, when you look at Email Fraud Defense, for example, it's sitting at around $10 a user, a year for an account of that same size. As well, mobile, we had a few nice wins this quarter. Again, it kind of hangs in around $10 a user a year for a customer in the 5,000-seat range. And for Threat Response, it's a little less, depending on the nature of the functionality that you're deploying. We see the initial deployments tend to be more e-mail-centric, so there will be a less full set of features that get included in that initial deployment. And as a result, that pricing is maybe 1/2 to 3/4 of a regular Protection sale. We see that as a great land-and-expand opportunity to then go into those accounts and sell them the full set of features around Threat Response, is kind of a next step in the sales cycle. So the net of it is, sometimes, people will joke with us that every product is $10. We're like the dollar store times 10. And it is a little true. It just tends to be a -- the nature of how we see value in delivering both a compelling set of capabilities to the customer, but also receiving what we think is a fair value in exchange for our shareholders, the intellectual property we have created and the value we deliver to the account.

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Operator [21]

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And our next question is from Jonathan Ho with William Blair.

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Jonathan Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [22]

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I just wanted to get some additional color in terms of what's happening with the international distribution opportunity and channel and maybe what's driving some of the pickup there.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [23]

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Yes, we were pleased with the results on the international side. We saw good wins across EMEA. While we have a smaller presence in the Asia Pacific region, we did have some nice wins there as well. We're starting -- I think there's a couple of things going on. So one is in Europe, you have the broad BEC effects that we're feeling across the U.S. that are equally present in Europe. You have the planning and anticipation for GDPR, which I think will elevate in importance as we work our way through '17. And then thirdly, there's just -- there's been more threat actor activity in Europe than we had historically seen, and I think all those things coupled together have been nice growth catalysts for us as we continue to gain market share over there.

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Operator [24]

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And our next question is from Gur Talpaz with Stifel.

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Gur Talpaz, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [25]

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With FireLayers, can you talk about your thoughts regarding the acquisition now that it's been under your belt here for a few months? And then how should we think about growth outside of e-mail-related businesses going forward and then as well as future acquisitions?

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [26]

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Great. So with respect to FireLayers, we're very excited about the work we're doing with that team, integrating it with our core Advanced Threat Detection (sic) [ Protection ]. So it's -- we had hoped -- we'd indicated earlier and that we would have product out in the middle part of the year. And we're on track for that. Nothing has changed. And so we think about revenue and revenue opportunity beginning in the second half. Again, just to remind folks, what we'll be able to do with that capability is identify threats associated with cloud applications. So if somebody is downloading a file from Box or Dropbox or OneDrive, we'll be able to identify and block malicious content coming into the enterprise, with the integration of FireLayers and TAP. And so we're excited about that. We're in a good number of early customer environments, getting some really nice feedback, and the feedback has been extremely positive. So we're optimistic about the contribution of revenue from that solution in the coming quarters. And you had another part of your question...

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Paul R. Auvil, Proofpoint, Inc. - CFO [27]

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It was about growth beyond e-mail. And I think the comment would be, again, we have seen some nice ongoing uptick in social and mobile, which is part of the emerging products category. While the product, what we call TAP for SaaS, is still officially in beta, we actually have an initial pipeline we're developing with some of our favorite customers that wanted to be involved in early sales cycles. I would say the early results look pretty promising. And so we feel quite good as we think about the arc between where we are today and 2020, that we're going to see a meaningful amount of growth that comes from demand for our products that cover off security needs that are above and beyond just protecting people when they're using e-mail.

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Operator [28]

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Our next question is from Andrew Nowinski with Piper Jaffray.

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Andrew James Nowinski, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [29]

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So just one question, maybe on the Fortune 1000. So excluding the McAfee tailwind, it seems like one of your largest opportunities that can really move the needle still is deeper penetration within the Fortune 1000. I know there are a lot of very good competitors in the SMB space, but I'm curious to know who you're most frequently displacing within that Fortune 1000 market.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [30]

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No, that's a good question. So we're excited about the continued opportunity to penetrate the Fortune 1000. Having 35% means we've got 65% to go. We see some combination of the remaining McAfee, obviously, and then Cisco and Symantec and then obviously some customers that might have migrated to Office 365 and haven't purchased anything yet. So it would be some combination of those.

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Operator [31]

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Our next question is from Steve Koenig with Wedbush Securities.

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Steven R. Koenig, Wedbush Securities Inc., Research Division - Research Analyst [32]

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I just wanted to ask about the channel. I think it was the start of this year, you relocated that function in the geographies, basically, as opposed to having a worldwide function. It was maybe one of the changes you made at the start of the year. You already got asked about maybe the international thing on that, but just more generally, and including in North America, how is that initiative coming in terms of building the channel up and making those channel partners more productive and greater contributors to your sales?

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [33]

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Yes, so in the quarter, we were pleased with the results that we saw with the channel, with -- when, which, again, we saw the channel touching over half of our business. And we're seeing a reasonable level of productivity from those channel partners. As a company, we have a strategy to focus on fewer partners, but go deeper with those partners. And we're seeing very good uptake from that particular strategy. And so we're executing that -- a similar strategy in Europe, where we're picking a few critical partners in each geography and going deep with those. We think that strategy will play out well, where we can drive great value for them and great value for us. And this is a continued investment that we're making, but we're very pleased in the current period with the results that we had.

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Operator [34]

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We'll take our next question from Ken Talanian with Evercore ISI.

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Kenneth Richard Talanian, Evercore ISI, Research Division - Analyst [35]

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So when you break down your pipeline, what areas do you believe have the highest likelihood to offer upside to the current annual billings guidance?

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Paul R. Auvil, Proofpoint, Inc. - CFO [36]

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That's an interesting question. The pipelines, as you would think, it's a very oriented toward the Protection and Advanced Threat areas because that's where we see a lot of the bulk of the business, if you will. But I would say that we've got some pretty interesting emerging product opportunities there. And we have a couple of very big archiving deals in the pipeline, but I wouldn't expect those to close until late this year.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [37]

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Yes, the one thing that I would say though is we've had really good success with this emerging products category. And while it's relatively new, we don't have years and years of history with it. And so frankly, there's probably upside there simply because we don't have years and years of history. And we were extremely happy with the results that we had in Q1. It really echoed what we saw in Q4. And so I think there's a lot of optimism simply because it's -- many of those products are growing faster than we thought they would.

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Paul R. Auvil, Proofpoint, Inc. - CFO [38]

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And part of the reason it's complicated, to answer the question, is that, and we've been through this before. It may be redundant for a lot of you, but just to remind everybody, we pay our salespeople in a completely neutral fashion irrespective of which product they sell. They basically have a recurring revenue quota, and they go out and close whatever deal or deals they can close in the most facile way in order to get to quota and then exceed quota and go to our club. So with that said, it's hard to handicap one thing over another because given that kind of equal construct on how compensation and quota retirement works, people are driving hard on whatever products they think are the right products to sell into, either a net new opportunity or selling as add-on to the existing customer base. But it's an interesting question, and again, I guess part of it is, we're very enthusiastic about the broader product line overall, so it's hard to pick one as a specific catalyst.

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Operator [39]

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Our next question is from Erik Suppiger with JMP.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD and Senior Research Analyst [40]

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On McAfee, when do you think that might elevate above the historical norms? And how much market share do you think you're getting of that enterprise business that's leaving the old McAfee product?

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Paul R. Auvil, Proofpoint, Inc. - CFO [41]

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Yes, it's hard to say when it's going to be above the norms. As a question that was already asked a little bit earlier, we don't plan for it to be above the norm because I don't think that would be a prudent or adequately conservative assumption. But one thing to keep in mind is that these enterprise customers literally do have 4 years to make the switch. So they have the right to continue for as long as they want to between now and 2021. And so while we do have a lot of really interesting conversations and sales cycles going, it doesn't necessarily comport directly to timing in terms of when people might move over. So I would say it's a little hard to tell at this stage, but I think that to your other question, I would say that we're getting the lion's share of the conversions of customers that are in the large- and mid-enterprise space, which is what we principally target, at the lower end of the market. It's hard to say we kind of opportunistically serve that market and pick up business here and there. But I suspect most of that business, which, again, was mostly served by the MX Logic platform which finally shut down recently. I would say that most of that business probably went to the players that serve the -- this SMB market, now Proofpoint, which is what we've been talking to Wall Street about for the last 5 quarters since we talked about the McAfee end-of-life.

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Erik Loren Suppiger, JMP Securities LLC, Research Division - MD and Senior Research Analyst [42]

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In the enterprise section, do you think that you might be 2/3 of that? You said the lion's share, is that -- maybe, would you be surprised if it was more or less than 2/3?

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Paul R. Auvil, Proofpoint, Inc. - CFO [43]

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I think it's hard to put an exact number on it. I mean, honestly, I would be surprised if we didn't get at least half. But I think we certainly have the opportunity to get quite a bit more than that, and we'll see how it plays out.

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Operator [44]

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Our next question is from Catharine Trebnick with Dougherty.

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Catharine Anne Trebnick, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [45]

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What processes have you been putting in place for metrics on sales? Other competitive -- not competitors, but other security players have overstaffed and over-divided the territories. I'm pretty curious to make sure that you guys don't run into the same issue. What methods do you put in place such that you don't over-divvy-up a particular region and don't hire -- over-hire for that region?

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Paul R. Auvil, Proofpoint, Inc. - CFO [46]

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Yes, we're pretty sophisticated in what we do there. I'm quite impressed with what the sales ops teams does. So we look very carefully at all the accounts and where the actual buying centers are for those customers, obviously, not only across the United States but around the world. And so as we think about breaking down territories, we're looking at a couple of things. One is how many buying centers do you have in your territory and how many mailboxes in each of those buying centers? And then it's a combination of both existing customers -- or rather new customers but also existing customers and how much whitespace opportunity we have in an account. So again, we have a pretty sophisticated set of mathematics to look at, for an existing customer, what's that TAM of unsold product. So one customer's TAM might be larger because all they bought is Protection. Another TAM might be smaller because they bought Protection, TAP, Threat Response and the social product. So we add all that together and look very carefully then at how to apportion the territories accordingly. And I would say that even in the U.S., we are still significantly underdistributed in terms of the opportunity out there versus the size of our sales teams, both for the people who are out in the field that cover the largest accounts as well as the inside sales teams that handle the accounts on the phone. And as part of all this, we continue to kind of evolve and upgrade not only how we manage that operation at a detailed metrics perspective, but we've also added some important leadership talent recently. I think there was a little bit of noise about some supposed reorg of our sales organization. We brought in a great individual from outside the company to run all the Americas for us, a great guy, great background, has hit the ground running. I'm impressed with the work he's done already. And then on top of that, we took a few of our best regional leaders and promoted them into larger jobs because they've done a great job and they were ready to step up to the next role. And then that's created some other opportunities to bring people in and kind of align the management level. So I think sometimes the noise associated with the growth and expansion of the leadership of the organization sometimes gets misconstrued as reorganization. But I'll tell you, the organization is executing really well, and we were not only very pleased with the last couple of quarters of performance, but as I look at the pipeline and the opportunity for the remainder of the year, as you can see, we not only had a nice guide for Q2 but a nice raise for the full year, both on billings and revenue.

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Operator [47]

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Our next question is from Gabriela Borges with Goldman Sachs.

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Gabriela Borges, Goldman Sachs Group Inc., Research Division - Equity Analyst [48]

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Maybe just to follow up on the Office 365. Proofpoint's also talked about being agnostic to how the e-mail server is deployed because I believe you can put your Proofpoint e-mail security in front of an on-premise e-mail service. So I would appreciate any color on whether you see customers move the security and the service to the cloud in lockstep or how independent those 2 factors are?

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [49]

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Sure. So we see a couple of things happening with -- as it relates to Office 365. So as customers begin to plan their journey to Office 365, they begin to evaluate their security and compliance capabilities, which typically are on-premise. And what we find is that as customers begin the migration process to Office 365, they want that security and compliance capabilities, they want those in place in the cloud at that time because you do not benefit from the overall economics of Office 365 if you're routing all your mail through your corporate network. And so there's a pretty nice economic catalyst to help the customers get moving on the security and compliance migration. Now as you indicated, so we can support many different configurations, and it's not uncommon for us to deploy in the cloud, basically protecting an on-premise environment. That is not an uncommon configuration. We will also sell to a customer an on-prem device that then can be migrated at their leisure to cloud, and we can manage -- help the customer manage the economics and transition through that. So we make it really easy as they think through the different dynamics of getting to Office 365.

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Operator [50]

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Our next question is from Patrick Colville with Arete Research.

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Patrick Colville, Arete Research Services LLP - Analyst [51]

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Can you talk through the puts and takes of competition with Symantec this quarter? Did they do anything interesting? Are they still bleeding?

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [52]

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No, I would say, from a competitive standpoint, I think we saw a pretty much consistent behavior from Symantec. Not a big change. And again, I think Symantec represents a pretty interesting opportunity for us in helping some of those customers move from the Symantec environment over to Proofpoint. But we didn't see a dramatic change competitively through the course of Q1.

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Paul R. Auvil, Proofpoint, Inc. - CFO [53]

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Yes, and I think one of the things that seems clear to us is they have such a big opportunity to go drive business around Blue Coat and driving their DLP Vontu products in the Blue Coat customers and driving Blue Coat into the installed base of Vontu, combined with then their opportunity with their next-generation endpoint to drive additional opportunities in the endpoint space. E-mail is a relatively small market and a small part of their business, and so it makes sense to me that their sales teams are likely mostly engaged there. And as a result, we don't see them along on e-mail.

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Patrick Colville, Arete Research Services LLP - Analyst [54]

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And Paul, would you say that that's still the #1 competitor?

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Paul R. Auvil, Proofpoint, Inc. - CFO [55]

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No, they certainly have #1 market share because they rolled out a tremendous amount of market share over many years. So from -- in terms of an incumbent from which we're able to then ultimately rotate from Symantec as the incumbent over to Proofpoint and drive business for Proofpoint, sure. As a competitor that shows up in the marketplace on a regular basis, either defending that share or trying to sell net new, no.

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Operator [56]

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Our next question is from Jayson Noland with Baird.

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Jayson Noland, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [57]

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And we were obviously off-base with our call today, and just to try to clarify there, do you see higher sales force attrition to start the year and have Q1 moderating through the year? I'm just trying to understand what we hear or what we're hearing versus typical seasonality.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [58]

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We did not see any inconsistent sales force turnover in Q1 from what we've seen historically.

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Jayson Noland, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [59]

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Is it typically higher at the start of the year?

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [60]

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It is, yes, it is, actually, because you have the classic, we put people on annual plans. We also have a very strong culture around performance management. So there is a close observation of an individual's performance over the period of the year and whether we think they should continue their employment with us as they enter the New Year.

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Operator [61]

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Our next question comes from Tim Klasell with Northland Securities.

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Timothy Elmer Klasell, Northland Capital Markets, Research Division - MD and Senior Research Analyst [62]

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Most of my questions have been asked, but -- the questions have been asked. But the collections seemed to be almost abnormally strong on the quarter. Was that happenstance? Or was there any changes in your billing terms on the quarter? Or maybe you can walk us through that if it was just pure happenstance, or was there something -- some change of behavior out there?

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Paul R. Auvil, Proofpoint, Inc. - CFO [63]

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Yes, I mean, we have a -- the one thing that always amazes me is the degree to which -- I think because we're a cloud service we have essentially no failure to pay. We have no bad debt write-off. And we have very few people pay late because -- and we do this obviously in a constructive way. But if you don't pay on time, we're shutting your service off, which is, of course, problematic for you. And so we have a team literally of 3 people that, at this point, are just collecting on the order of $150 million a quarter. And this team does a great job. Now I do think that having more business through the channel obviously is helpful because the channel helps facilitate that collection in an even more accelerated way. But this quarter, as I noted, with 38 days for DSOs, it's a record low for us over the last 5 years. I honestly can't entirely explain in that, as I said in the prepared remarks, people paid better than timely. Meaning, we literally had people who had amounts that were due in the month of April that just paid in March. And it's not us brow-beating them or bending their elbow or -- they just pay. And so that's great, and so it accelerated cash flow into Q1 that otherwise would have been in Q2. Hence, we're holding our total guide for the first half of the year at about $40 million. But we're always pleased to get paid sooner rather than later. But there's nothing extraordinary. It was just an extraordinary collections quarter.

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Operator [64]

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Our next question is from Michael Kim with Imperial Capital.

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Michael Wonchoon Kim, Imperial Capital, LLC, Research Division - SVP [65]

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Could you talk a little bit about the ramp with your ecosystem partners? I think Palo Alto is probably furthest along in maturity. But kind of curious about the pace in maturity of some of the other partners. And then just in aggregate, do you think over the course of the year that the ecosystem partners contribute similar in a manner of a viewpoint to the new and add-on business?

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [66]

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Yes, I'll start, and Paul will probably want to jump in. So as you indicated, we definitely have the most maturity in terms of relationship with Palo Alto. And we're just seeing very good momentum from a go-to-market perspective, where it's carrying out in lots of joint cooperation. In specific deals, there's lots of cooperation with the channel. We're seeing channel partners that hadn't been Proofpoint resellers in the past coming to us as a result of the relationship. They want to sell both products. So it's working really well. We announced that relationship at the beginning of 2016 in January, so we're just a little over a year into it. And I couldn't be more pleased with the results thus far. If I look then down at the other relationships we've announced. So Splunk, we've got all of our technical integration in place, and we're really just getting the go-to-market in motion right now. And the same is really true of both Imperva and CyberArk. So Palo Alto leads the pack in terms of where we are from a maturity standpoint. But we're very optimistic to extend the success we've had with Palo Alto to Splunk, CyberArk and Imperva. And I'll let Paul comment on how to think about the impact on our numbers.

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Paul R. Auvil, Proofpoint, Inc. - CFO [67]

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Yes, I mean, I think they're not direct channels. Meaning, they don't actually sell our products, right? They're influencers. We meet in a channel with them. And so it's hard to put a specific quantitative impact. But I can tell you, in the current most recent quarter, Q1, the relationship with Palo Alto was meaningful in helping to facilitate new deals into the pipeline as well as helping to drive some deals over the line and close them out. This enabled bridge between WildFire and our TAP product is a high-value item, a high-value feature. And people will remark that we have more integration between Proofpoint, Palo Alto, Splunk, CyberArk than companies with larger product lines all under the same brand have in terms of the integration of their products, and people are impressed with that. So as I look at the full year, I can't really put a specific number on it, but it absolutely is one of a number of factors that creates a tailwind to creating pipeline and also helping to facilitate close rates, especially on larger accounts, where these bigger partners, like Splunk and Palo Alto, have meaningful account presence in those relationships. And that favorable handshake, if you will, in the account and the integration that we can provide absolutely is one more thing that tips the account in our favor and helps us get the deal closed. So I know that's a lot of qualitative statements with no real numbers, but I just can't put numbers on it. But it's no doubt an important effect, and we'll likely add a few other partners to that cohort over the course of the year.

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Operator [68]

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Our next question is from Jack Andrews (sic) [ Jake Andrews ] with D.A. Davidson.

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Jon Philip Andrews, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [69]

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I was wondering if you could just drill down a little bit more on the -- your social media product in particular, if there's any parameters around the size or growth rate about what's going on there.

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Paul R. Auvil, Proofpoint, Inc. - CFO [70]

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Yes, in terms of size, we haven't actually disclosed the social number specifically but it is part of that emerging products cohort, which was over 10% of the new and add-on business we closed this quarter and growing at over 100%. I think we are seeing an evolving awareness on the part of customers that you need to protect not only people when they're on e-mail, but you need to protect those people when they're in the social venues and mobile. And so we think that broader product line will continue to accelerate its -- no, accelerate is not the right word, will continue to be an accelerated element of what drives growth for the business as characterized in the emerging products commentary from the last couple of quarters. I also think that just that breadth of product line is an important factor that helps us win in some of our larger accounts because they understand that they'd really like to have a single platform that protects not only, again, people in e-mail but in mobile, social and then these other venues in SaaS. And so while we may not have as large a direct attribution to revenue coming from social right now as maybe we would have thought of when we first did the acquisition, it's absolutely an important part of how people pick the Proofpoint platform as a basis for deciding on an overall solution set to meet the needs of protecting and defending your employees when they're operating with content that's outside of your firewall.

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Operator [71]

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Our next question is from Srini Nandury with Summit Redstone Partners.

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Srini Nandury, Summit Redstone Partners, L.L.C - MD, and IT Hardware and Software Analyst [72]

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You addressed this before, you talked about competition vis-à-vis Symantec and the legacy providers. Can you talk about Mimecast? We keep hearing that Mimecast is getting a fair shake with large enterprise customers. Historically, they're focused only on the mid-market.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [73]

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Yes. We've seen Mimecast traditionally at the very low end of the segments that we serve. There is some amount of competition in the -- in where our low-end inside salespeople might run up against Mimecast. We have, on occasions, seen them working in larger accounts. We've consistently had a very high win rate, and we haven't seen them have a tremendous amount of success in the larger customers as we think about larger customers.

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Operator [74]

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And our final question comes from Howard Smith with First Analysis.

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Howard S. Smith, First Analysis Securities Corporation, Research Division - MD [75]

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I want to circle back to some of your archiving comments. I understand the slowdown due to some very large deals taking a little longer to close. But in your prepared remarks, I thought you also mentioned some shift of focus to some of the emerging products from archiving. And in light of your kind of product neutral approach to quota, is that in marketing budgets? Or maybe you could explain what you mean by kind of changing priorities there?

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [76]

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Yes, I'll start, and Paul is going to jump in. It's very simple. I think what's happening is we're seeing strong demand profiles for some of these emerging products. And given that we don't have a bias in terms of where a sales rep spends their time because there's been this stronger demand profile for some of our emerging products, we just feel like reps are going to move that way because of the opportunity that exists. No more complicated than that. And as we indicated earlier, some of these archiving opportunities just are larger, they will take more time to move through the pipeline. And so what we see is that short term, we see the emerging products really playing a role. But we very much are committed and believe the archiving business will play a critical role in our growth over a long period of time.

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Paul R. Auvil, Proofpoint, Inc. - CFO [77]

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Yes, I think just to slightly punctuate that, part of what we're trying to get across is that I think in a moment of time, a sales rep is working on a variety of things in their pipeline, and as we're kind of handicapping what we think is going to happen in the next few quarters, I think we're going to see an acceleration in the close rates around the emerging products as the sales team gets more excited about that and it will continue then to be a meaningful contributor. And it doesn't mean that we won't be driving archiving business but because those archiving deals have longer sales cycles, I think it is going to take longer to kind of reel in and land as opportunities that you then see reflected in our revenues.

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Howard S. Smith, First Analysis Securities Corporation, Research Division - MD [78]

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Congratulations on the 5-year anniversary of a successful IPO.

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Operator [79]

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And that does conclude today's question-and-answer session. I would now like to turn the call back over to Gary Steele for any additional or closing remarks.

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Gary L. Steele, Proofpoint, Inc. - CEO and Director [80]

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Well, great. Thank you very much. We want to thank everyone for taking the time to join us today, and we look forward to talking to you in another quarter. Thank you so much.

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Operator [81]

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And that does conclude today's conference. Thank you for your participation, and you may now disconnect.